GDP growth slows
This morning the commerce department released 4th quarter GDP growth figures:
Gross domestic product rose at a seasonally adjusted 0.6% annual rate October through December, the Commerce Department said Wednesday in the first estimate of fourth-quarter GDP.
If you factor in inflation near above 3% YoY in Q4, then the real economy shrank.
Aside from the housing slump, slowing consumer spending, inventory liquidation and lower overseas sales restrained the economy. The 0.6% pace wasn’t only much slower than the third-quarter’s racing 4.9%, it was far below expectations on Wall Street. The median estimate of economists surveyed by Dow Jones Newswires was 1.2% GDP growth during the autumn months.
Economists still see only a 50% chance of recession this year. As more financial shoes drop–monoline insurers will be downgraded triggering billions more in writedowns, the commercial real estate bubble will implode–we’ll likely be a in a recession this quarter.
GDP acts as a scoreboard for the economy by measuring all goods and services produced. Its housing component, residential fixed investment, dropped by 24% in the fourth quarter, reducing overall GDP by 1.18 percentage points. Third-quarter investment had fallen by 21%, taking 1.08 percentage points out of GDP. The 24% drop was the worst since a 35% plunge during fourth-quarter 1981.
No surprise that residential fixed investment continues to crater……
The biggest GDP component, consumer spending, decelerated in the fourth quarter, rising 2.0% after increasing 2.8% in the third quarter. Purchases of durable goods rose 4.2% in the fourth quarter, after increasing by 4.5% July through September. Fourth-quarter nondurables spending rose by 1.9%. Services spending climbed 1.6%. Overall, consumer spending contributed 1.37 percentage points to GDP October through December; it had contributed 2.01 percentage points in the third quarter.
I’m amazed that consumer spending continued to expand, though again I’d note that inflation grew faster, meaning real growth in consumer spending was negative. And a not insignificant part of consumption growth was likely from gasoline purchases. What were the inflation readings?
The price index for personal consumption expenditures rose by 3.9% after increasing 1.8% in the third quarter.
The much-watched PCE price gauge excluding food and energy increased 2.7% after rising 2.0% in the third quarter.
The price index for gross domestic purchases, which measures prices paid by U.S. residents, rose 3.8% after increasing 1.8% in the third quarter.
If you don’t drive or eat, inflation was a mere 2.7%. If you do, it was near 4%. [Another post this week will discuss why, despite these elevated inflation numbers, some folks still fear DEFLATION more than inflation. It's a fascinating debate....]
But as credit is tightening, so is the consumer’s ability to finance incremental consumption. Without credit, 2008 will likely show a contraction in consumer spending. Since it drives 70% of the economy, a decline in consumption will most likely mean GDP contracts in the aggregate.
The stock market, incidentally, may cheer this number. The fact that GDP growth came in below economists’ expectations will give the Fed extra incentive to cut interest rates this week. Right now Fed Funds futures are assuming a 50 bps cut in the target rate. Count on it.
This, of course, is unfortunate. Cutting interest rates won’t solve our economic problems, it will just mask them with cheap money. A good way to think about this is to look back at BKUNA’s recent earnings call.
On it, the Florida bank’s management team spoke about the benefit they’ll derive from lower interest rates. Lower rates will help option ARM holders refinance into fixed rate mortgages. That’s not a bad thing in and of itself. But throwing more credit at housing only serves to keep prices high. We know, based on housing’s historical relationship to median income, that prices are still way to high. To bring sanity back to that market, prices must revert to the mean. Cheap credit keeps that from happening, it keeps the bubble from deflating.
[It's interesting that BKUNA would want folks to get out of ARMs and into fixed rate mortgages. The bank makes more money on ARMs, or should after rates adjust upward. But they know better than anyone that as ARMs reset, borrowers will simply mail in the keys and walk away from the property......]